Kaufman: At last, some bright news on too big to fail

I have been a vocal pessimist for the past couple of years about how little has been done to fix our “too big to fail” bank problem. But three things have happened in the past couple of weeks that give me some hope that progress is finally being made.

First, our regulators are finally putting some bite where their bark had been. They lowered the boom on JPMorgan Chase for its behavior during and after the London Whale fiasco. The bank was fined $200 million by the Securities and Exchange Commission, $300 million by the Office of the Comptroller of the Currency, and $200 million by the Federal Reserve. In an especially welcome sign that regulators around the world are beginning to work together, the U.K.’s Financial Conduct Authority added a $200 million fine of its own.

Perhaps even more important than the fines were the very critical statements by the regulators about JPM management and the fact that the SEC stuck with Chair Mary Jo White’s pledge to no longer allow banks to pay fines without admitting wrongdoing.

JPM CEO Jamie Dimon was one of five bank executives criticized by the SEC. The irony of that, of course, is that right after the financial crisis he led the Wall Street mantra that the big banks were not responsible for the crisis and no new banking regulations were needed.

Second, more and more financial industry leaders are speaking out and acknowledging that our megabanks are bigger than ever and the Dodd-Frank Wall Street Reform legislation of three years ago is not going to fix the TBTF problem. Bob Diamond, former CEO of the U.K.’s Barclay’s Bank, joined former megabank CEOs such as Citibank’s Sandy Weill who have admitted banks are still TBTF. Echoing what many of us said during the debate on Dodd-Frank, Mr. Diamond said, “first and foremost we must establish a global regime that is rigorously tested – with ironclad protocols and agreements for implementation. Regulators across borders must have clear responsibilities and be prepared to act on them.”

Mark Carney, the new head of the Bank of England and Chair of the G-20’s Financial Stability Board, agreed with Diamond that something must be done. “We are committed to ending ‘too big to fail,’” he said, calling for leverage ratios and standard risk weights across all the banks. “We must ensure failing banks can be resolved or recapitalized while maintaining continuity of essential services.” He called for additional actions to be taken by the FSB to make this a reality, including bringing “shadow banking” such as money markets out into the open, and introducing real reforms to the derivatives’ market to build “transparency through platform trading and trade reporting requirements.”

What makes the calls for action by Mr. Diamond and Mr. Carney especially significant is that it is beginning to look like Europe will now be adopting much of what the U.S. Federal Reserve has called for in recently formulated rules. Given common regulations in the U.S. and Europe, one of the strongest arguments our megabanks have used against new regulations – that they would be put at a competitive disadvantage internationally – can no longer be used.

Finally, the withdrawal by Larry Summers from consideration to be the next Federal Reserve Chair is welcome news. Mr. Summers and Treasury Secretary Robert Rubin were the driving forces during the Clinton administration to repeal the Glass Steagall Act and pass legislation that took the government out of the regulation of derivatives. As a key player in the first Obama administration he fought against the inclusion in Dodd-Frank of measures such as Brown-Kaufman that would have reduced the size of our megabanks. Despite his admitted brilliance, having him as Fed Chair might well have interfered with the real progress being made by U.S. and European central banks.

As promising as these recent developments have been, the reality is that neither the President nor Congress are dealing with the TBTF problem. Treasury Secretary Lew kicked the can down the road a couple of months ago when he said if TBTF is not solved by the end of the year, “we are going to have to look at other options.” Although there has been some talk about it in the House of Representatives, most of the proposals heard from that source would only make things worse.

But let’s look at the bright side. Regulators here and in Europe have real power, and there is now a decent chance they will use it to end TBTF without any help from the governments they serve.

Ted Kaufman is a former U.S. senator from Delaware. Read all of his columns at tedkaufman.com.